What is product market fit?
Product market fit is the degree to which a product satisfies demand in a given market. A good product market fit occurs when an entrepreneur or business identifies a need in the market and develops a solution that fulfills it. Product market fit is critical to the success of every business.
Companies use product lifecycle management (PLM) software during product development throughout its entire lifecycle, from inception to manufacturing to servicing. These software tools increase productivity, improve quality, and shorten the time to market.
Why is product market fit important?
Businesses can’t grow without product market fit. It can be a make-or-break for startups, especially since venture capitalists often require sufficient evidence and reasoning before they invest in a new business. With a market in demand for the product, the startup has a better chance of success.
Product market fit isn’t only crucial for startups. Established businesses with successful portfolios have to consider product market fit as they develop new products and evolve to meet changing needs. As proven companies generate new, innovative ideas, they should evaluate whether their new solutions genuinely meet a market need before investing in its development and launch.
Steps to achieve product market fit
Achieving product market fit looks different across businesses as industries, product types, and audiences vary. However, teams can customize and follow some of these general steps:
- Identify and define the target customer. Entrepreneurs and businesses must identify the target customer most likely to benefit from the product. Developing buyer personas for various customer segments to understand the target customer clearly is beneficial.
- Research customer needs and gaps in solutions. In addition to outlining buyer personas, businesses need to talk to their customers to understand their pain points. Tactics include interviewing customers directly, sending out surveys, and interviewing internal teams to understand recurring customer complaints.
- Specify the value proposition. Businesses need to consider how their product will meet customer needs better than competitors to stand out. It should address a specific challenge, and the way the solution solves that challenge should be clear to customers.
- Test a minimum viable product (MVP) with customers. Before launching, entrepreneurs and businesses can show their products to a small group of potential customers and gather feedback to discover areas of improvement. This step is essential for ensuring the product accurately fits customer needs rather than assuming it will.
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Measure product market fit. Businesses can assess whether they’re on the right track in various ways. Reviewing customer retention rates, profit generation, and engagement with marketing initiatives are great places to start. Additionally, businesses can identify their total addressable market (TAM), the number of people who can benefit from the product.
Calculate TAM by multiplying the average annual contract value by the total number of customers. Then businesses can determine what percentage of the TAM are customers, which should increase over time as the company approaches achieving product market fit.
- Evaluate product market fit over time. Successful businesses continuously review and maintain their product market fit and adapt their business to serve evolving customer needs.
Benefits of product market fit
Product market fit helps businesses validate that their solutions are worth pursuing and can help prevent them from failing. Some additional benefits include:
- More revenue. Products that achieve product market fit generate more revenue than those that don’t. Launching a new product the market needs and loves means more money coming into the business.
- Better competitive advantage. When an entrepreneur or established business launches a new product that achieves product market fit, they have a competitive advantage, especially if their primary competitors don’t carry a similar offering. Competitive advantage leads to increased revenue and new customers.
- Customer loyalty. Solving problems with innovative and valuable solutions allows brands to build customer commitment.
- Reduced marketing costs. It’s easier to sell products that meet product market fit because the audience is already looking for a solution to a need. This means that businesses may be able to reduce their marketing costs as the products sell themselves.
Examples of product market fit
Netflix is a well-known brand that found its product market fit by beating out DVD rental store competitors with rentals by mail. Following the success of its mail subscription service, Netflix positioned itself as the more accessible alternative to renting and traditional television by offering streaming. They’re an excellent example of a brand that continuously alters its offerings to meet the market's needs.
Spotify achieved product market fit by opening up the availability of music for a small fee. It allowed music lovers to legally stream their favorite songs. The existence of a large market of music lovers helped turn Spotify into a product market fit success story.
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Alyssa Towns
Alyssa Towns works in communications and change management and is a freelance writer for G2. She mainly writes SaaS, productivity, and career-adjacent content. In her spare time, Alyssa is either enjoying a new restaurant with her husband, playing with her Bengal cats Yeti and Yowie, adventuring outdoors, or reading a book from her TBR list.
